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Price is high for a cup of tea
Author£ºColourful Tea    Time£º2007-6-11    Hits£º1965

The Marlborough Express | Monday, 11 June 2007

AdvertisementThe apparent price of a cup of tea has never looked so high, especially when it comes to hikes in our interest rates, writes The Marlborough Express in an editoriaL

There has been much condemnation of the decision with its likely effect on the already soaring dollar and its apparently unlikely effect on the still-booming house market.

In 1987, at the height of the Rogernomics revolution which radically reshaped the New Zealand economy, Prime Minister David Lange called for a break in the rate of changes being made in the economy in an effort to ease the load on the vulnerable sections of society, foreshadowing the disintegration of his government.

And Reserve Bank Governor Alan Bollard's own "cup of tea" in 2006 now seems like an expensive decision in light of the present rate increases.

After rather bravely pushing rates up in the election year of 2005, moving them from 6.5 percent at the start of the year to 7.25 percent in December, Dr Bollard inexplicably called time out in 2006, despite the housing market continuing to show all the characteristics of a runaway train.

Through a series of seemingly contradictory statements which continued to cite an economic slowdown that never quite seemed to happen and the relentless rise in the housing market, rates remained at 7.25 percent.

But all that has now changed and the situation is clearly laid out in the bank's latest statement, with domestic demand continuing to grow, the housing market staying at record levels and other indicators such as consumer confidence and the business sector's employment and investment intentions staying strong.

And the other factor which comes into play here is government spending, which despite statements that our infrastructure investment cannot be put off, is something that should be able to be addressed.

On top of this there is the "spectre" of increased dairy incomes continuing to keep economic activity higher than the Reserve Bank would like it to be. Seldom has increased farmer income seemed such a bad thing.

All this leaves the Government in a bit of a pickle.

The problem with taking a big stick to interest rates, is that by definition rate rises as an instrument of economic control are medium term at best, hence the lost opportunity to effect a slow down in 2006, and there is no sign of a letup in the housing market.

The dominant forces which set our exchange rate are mostly beyond our control, as we have strong ties to other currencies which to a large extent determine our fate.

With Dr Bollard just having been appointed for a further term, there is unlikely to be any massive turnaround in policy and further rate rises seem inevitable.

The pressure on the Government to find other ways of reining in the housing market seems likely to continue.

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